Ferri: Why Peter Lynch Was Wrong

Peter Lynch was legendary. He was also wrong.

Reviewed by: Richard Ferri
Edited by: Richard Ferri

Peter Lynch was legendary. He was also wrong.


I love you man, but you’re wrong!

Legendary Fidelity Magellan fund manager Peter Lynch wrote “buy what you know” in his classic book, One Up on Wall Street. The basic principle is simple: You’re more likely to be successful in the market if you buy what you’re familiar with. Peter Lynch was wrong; or at least he wasn’t quite right.

Warren Buffett once commented that had you been at Kitty Hawk in 1903 and marveled at the Wright Brothers' first flight, you may have envisioned a day when fast and efficient air travel for the masses would be commonplace. Yet, Buffett commented in 2002, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright.”

Buffett recently quipped, “Can you remember the names Pan American, Eastern, Braniff, Aloha, Allegheny, Comair, National, TWA, Republic, Trump Shuttle, Piedmont, Midwest and Ozark? Well, don’t bother, because they are all out of business.”

“Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” said Buffett, as reported by TheStreet.com. “It’s been a death trap for investors.”

Howard Silverblatt is senior index analyst for S&P Dow Jones Indices. In addition to general market research and commentary, he is responsible for the statistical analysis of S&P Dow Jones Indices’ family of U.S. indices, including the S&P 500.

Silverblatt recently calculated the results of 10 industry groups in the S&P 500 from 1998, when the index hit 1,000 for the first time, through July 15, 2014, when the S&P 500 was rapidly approaching the 2,000 mark. Figure 1 illustrates the industry group total returns including dividends over this period. See the spreadsheets embedded in Silverblatt’s entertaining video for this data that he posted to his Twitter feed on July 22, 2014 at www.twitter.com/hsilverb.

Figure 1: S&P 500 industry group total returns from 2-2-1989 through 7-15-2014

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Smartphones were groundbreaking technology in the late 1990s. BlackBerry personal digital assistants (PDAs), also known as palmtop computers, were just entering the marketplace. These smart devices combined email with paging, phone services and other unique communication features.

Early adopters of this technology realized mobile computing would change the way the world communicated, and that telecom companies were poised to cash in. Equipment manufactures provided the hardware for the end-users and network build-outs, while the phone companies provided a delivery pipeline over cell towers and newly laid fiber optics.

Yet, since the late 1990s, telecom stocks have rivaled Buffett’s airline experience. The industry is a graveyard of dead equipment manufactures and bankrupt pipeline providers. The price-only return from the telecom industry has been less than zero. The total return of telecom stocks barely kept up with inflation due to dividend payments.

Large gains by Apple (ticker: AAPL) didn’t matter to the telecom industry because this company and others like it are categorized as information technology companies by S&P, not telecom. Who would have guessed a desktop computing company would create the world’s best-selling smartphone? Ironically, despite Apple’s huge surge in its stock price, information technology also underperformed the S&P 500 over the same period.

I read Peter Lynch’s book when it was released in 1989. It was well written and informative, but I’m glad I didn’t follow his advice. The mass adoption of a new technology doesn’t equate to mass profits for investors. Often there is over-investment, which tends to produce a less-than-desirable outcome.

The best way to avoid a love affair with a new industry is to buy a broad market index fund. It’s a sensible way to gain market exposure to all industry groups and not run the risk of underperforming the broad market.


For a full list of relevant disclosures, click here.


Rick Ferri, founder of Michigan-based Portfolio Solutions, is a widely recognized index investor and the author of several books on index investing.


Richard Ferri, CFA, is founder and managing partner of Portfolio Solutions. He directs the firm's research and education, and is head of the Investment Committee. Ferri writes regularly for the Wall Street Journal, Forbes, the Journal of Financial Planning and his own blog at www.RickFerri.com.